AHIC Stable Value Quarterly

Transcription

1 AHIC Stable Value Quarterly Aon Hewitt Investment Consulting Stable Value Research Team September 30, 2014 Aon Hewitt Retirement and Investment Investment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company.

2 Contents State of the Market 3 Regulatory Update 4 Industry News 5 Recent Fund Eliminations / Creations 6 Wrap Providers 7 AHIC Stable Value Database Overview 9 AHIC Stable Value Database Duration Comparison 10 AHIC Stable Value Database Market to Book Ratio Comparison 11 AHIC Stable Value Database Annualized Crediting Rate Comparison 12 AHIC Stable Value Database Current Yield Comparison 13 AHIC Stable Value Database Cash Level Comparison 14 AHIC Stable Value Database Annualized Crediting Rate and M/B Ratio 15 About the AHIC Stable Value Research Team 16 This report contains statements of fact relating to economic conditions generally and to parties other than Aon Hewitt. Although these statements of fact have been obtained from and are based on sources that Aon Hewitt believes to be reliable, we do not guarantee their accuracy. Information in this report may be preliminary, incomplete, incorrect, and/or condensed. All opinions and estimates included in this report constitute Aon Hewitt's judgment as of the date of this report and are subject to change without notice. This report is for informational purposes only. It is not intended as an offer or a solicitation with respect to the purchase or sale of a security, and it should not be interpreted as such. This report does not take into account the investment objective, financial situation, or particular needs of any particular investor. Investors should obtain individual financial advice based on their own particular circumstances before making an investment decision based on any information / statements / recommendations in this report. Aon Hewitt, 2015 Investment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company. 2

3 State of the Market The stable value industry has experienced many changes since 2008 s financial crisis. Chief among these changes has been the banking industry s retrenchment from the stable value wrap business. While banks have generally been retreating from the wrap market, insurance entities have been increasing their footprints. Much of the new wrap capacity being offered has more stringent terms than in years past, higher fees, and requirements for some asset management to be offered through the wrap provider or related entity. The interest rate environment is being closely observed by market participants. With yields at very low levels, the crediting rates of stable value funds are generally muted. A key risk being monitored by industry participants is the detrimental impact of rising interest rates on market-to-book ratios. Interest rates rose during 2013, and as a result, market-to-book ratios decreased (average of 100.8% as of December 31, 2013 compared to 103.1% as of December 31, 2012). However, with continued declines in interest rates over the first nine months of 2014, the average market-to-book ratio rose modestly to 101.0%. Some funds are taking defensive measures in light of the low rate environment and the risk of a jump in rates; such measures include maintaining higher-than-typical allocations to cash and limiting new investor inflows. While stable value performance might suffer in the short-term from a rise in interest rates, over long-term periods, stable value historically has performed well when compared to alternative strategies such as money market funds. Investment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company. 3

4 Regulatory Update The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 ( Dodd-Frank Act ) included provisions intended to regulate swaps that could potentially have adverse implications for stable value. The Dodd-Frank Act required that the Commodity Futures Trading Commission ( CFTC ) and Securities and Exchange Commission ( SEC ) initiate a 15-month study to ascertain whether stable value wrap contracts would be included in the definition of a swap (it should be noted that even if stable value wrap contracts are defined as swaps, some type of exemption might still be possible). The study was completed without a conclusion being reached, but the CFTC and SEC have been tasked with re-exploring the issue. As of the publication date of this AHIC Stable Value Quarterly, the matter is still outstanding. The investigation of wrap contracts in stable value has more recently taken a back seat to money market reform. The SEC has been exploring potential amendments to the rules that govern money market funds, intended to address the susceptibility and impact of substantial redemptions. Money market funds and stable value funds are often utilized as capital preservation vehicles in defined contribution plans and as there could be implications to both fund categories, the situation is being closely monitored. Recently, the SEC published new rules for money market funds that will lead to certain funds implementing floating NAVs, liquidity fees, and/or redemption gates. Please refer to the June 30, 2014 Stable Value Quarterly for more information on money market reform. Investment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company. 4

5 Industry News In recent months, several managers have announced that they have removed various restrictions and re-opened their stable value strategies to new clients. Investment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company. 5

6 Recent Fund Eliminations / Creations 2012 Elimination Schwab Stable Value Fund Elimination Union Bank Stable Value Fund Elimination SEI Stable Asset Fund Creation Reliance Trust New York Life Anchor Account Series 2013 Elimination Fifth Third Stable Value Fund (eliminated in late 2013 with assets seeding new vehicle, Goldman Sachs Stable Value Collective Trust) Creation Goldman Sachs Stable Value Collective Trust (began on September 27, 2013) 2014 Elimination Northern Trust Collective Stable Asset Fund Elimination Regions Stable Income Fund The listing on this page may not be an all-inclusive listing of fund eliminations and creations. Investment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company. 6

7 Wrap Providers Footnotes are provided on the following page. Investment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company. 7

8 Wrap Providers Investment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company. 8

9 AHIC Stable Value Database Overview¹ September 30, 2014 The information included in the following six pages was gathered from 19 stable value collective trusts. These trusts are managed by 16 firms that collectively manage $117.5 billion in stable value commingled fund assets (and additional assets in separately managed portfolios). As of September 30, 2014, for the 19 collective trusts: The average duration was 2.5 years. The average market-to-book ratio was 101.0%. The average annualized crediting rate was 1.6%. The average current yield was 1.7%. The average cash level was 7.3%. AHIC Commentary Durations have generally settled in the 2 3 year range for stable value portfolios. Driven by rising interest rates, market-to-book ratios fell over 2013, but with a surprising drop in rates during 2014, the average market-to-book ratio increased modestly from 100.8% as of December 31, 2013 to 101.0% as of September 30, Due to market-to-book premiums, annualized crediting rates had been able to remain ahead of current yields. However, with marketto-book premiums having decreased, annualized crediting rates and current yields are converging. With the shrinking of available yield as well as decreasing market-to-book ratios, there has been a reduction in crediting rates. The September 30, 2014 annualized crediting rate average of 1.6% compared to the December 31, 2013 average of 1.6%, December 31, 2012 average of 2.0%, and December 31, 2011 average of 2.5%. The average cash level was 7.3% with wide variability among the data set s constituents. ¹ Averages are unweighted across the collective trusts/separate account composites. Past data sets may differ from current data set as funds/composites liquidate over time, new funds/composites are created, data becomes available, funds/composites information is added or removed, etc. Statistics are reported by the investment managers; there may be differences in calculation methodologies among the managers. Investment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company. 9

10 AHIC Stable Value Database Duration Comparison September 30, 2014 * Statistics are reported by the investment managers; there may be differences in calculation methodologies among the managers. Investment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company. 10

11 AHIC Stable Value Database Market-to-Book Ratio Comparison September 30, 2014 Purple horizontal line represents 100.0% level * Statistics are reported by the investment managers; there may be differences in calculation methodologies among the managers. Investment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company. 11

12 AHIC Stable Value Database Annualized Crediting Rate Comparison September 30, Day Treasury Bill Yield: 0.02% 2 Year Treasury Note Yield: 0.57% * Statistics are reported by the investment managers; there may be differences in calculation methodologies among the managers. Investment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company. 12

13 AHIC Stable Value Database Current Yield Comparison September 30, Day Treasury Bill Yield: 0.02% 2 Year Treasury Note Yield: 0.57% * Statistics are reported by the investment managers; there may be differences in calculation methodologies among the managers. Investment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company. 13

14 AHIC Stable Value Database Cash Level Comparison September 30, 2014 * Statistics are reported by the investment managers; there may be differences in calculation methodologies among the managers. For instance, some managers may classify cash as that held outside of the synthetic portfolio while others may include all cash across the portfolio. Investment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company. 14

15 AHIC Stable Value Database Annualized Crediting Rate and M/B Ratio September 30, 2014 * Statistics are reported by the investment managers; there may be differences in calculation methodologies among the managers. Investment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company. 15

16 About the AHIC Stable Value Research Team The Aon Hewitt Investment Consulting Stable Value Research Team is composed of seasoned investment professionals from across the U.S. investment consulting practice. Team members have experience with structuring investment contracts, issuing investment contracts, evaluating creditworthiness of insurance company products, conducting due diligence on synthetic investment contract-focused portfolios, and producing leading-edge stable value research. The Team produces research and ratings for stable value portfolios, structures stable value portfolios, develops investment guidelines, and provides educational training to clients. In addition to traditional stable value research for clients that have investments in stable value portfolios, the Team also has experience with assisting the wrap provider marketplace with due diligence of stable value managers. Please send an to if you would like to learn more about our capabilities and services. Investment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company. 16

17 Legal Disclosures and Disclaimers Investment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc. ( AHIC ). The information contained herein is given as of the date hereof and does not purport to give information as of any other date. The delivery at any time shall not, under any circumstances, create any implication that there has been a change in the information set forth herein since the date hereof or any obligation to update or provide amendments hereto. This document is not intended to provide, and shall not be relied upon for, accounting, legal or tax advice or investment recommendations. Any accounting, legal, or taxation position described in this presentation is a general statement and shall only be used as a guide. It does not constitute accounting, legal, and tax advice and is based on AHIC s understanding of current laws and interpretation. This document is intended for general information purposes only and should not be construed as advice or opinions on any specific facts or circumstances. The comments in this summary are based upon AHIC s preliminary analysis of publicly available information. The content of this document is made available on an as is basis, without warranty of any kind. AHIC disclaims any legal liability to any person or organization for loss or damage caused by or resulting from any reliance placed on that content. AHIC. reserves all rights to the content of this document. No part of this document may be reproduced, stored, or transmitted by any means without the express written consent of AHIC. Aon plc All rights reserved. Investment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company. 17

18 About Aon Hewitt Aon Hewitt empowers organizations and individuals to secure a better future through innovative talent, retirement and health solutions. We advise, design and execute a wide range of solutions that enable clients to cultivate talent to drive organizational and personal performance and growth, navigate retirement risk while providing new levels of financial security, and redefine health solutions for greater choice, affordability and wellness. Aon Hewitt is the global leader in human resource solutions, with over 30,000 professionals in 90 countries serving more than 20,000 clients worldwide. For more information, please visit aonhewitt.com. Investment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company. 18